E.G. Hunter, president of the National Water Commission. - File

National Water Commission (NWC), a state monopoly that produces and distributes potable water supplies, last week floated a seven-year bond on the Jamaican market, successfully raising $900 million after a one-week private placement.

But the debt has come at a very heavy price, an initial 21.17 per cent on the first six-month coupon payment, a premium of more than four percentage points above the prevailing benchmark six-month Treasury bill rate.

NWC spokesman Charles Buchanan said the proceeds would be used to pay down some US-dollar debt.

"The bond issue has allowed us to retire portions of shorter-term debt ..." said Buchanan, the head of corporate communications.

The liabilities are attached to loans that financed repairs to the hurricane-damaged Yallahs Pipeline, which pulls water to the Mona Reservoir for distribution within Kingston, and that funded a portion of the Soapberry, a triple-agency joint-venture project that built a state-of-the-art sewage treatment facility serving parts of the capital as well as sections of Portmore.

The NWC Government of Jamaica Guaranteed Note 2016 is a variable rate instrument, priced at the six-month benchmark treasury, WATBY, plus a reset of 175 basis points.

The last six-month bill yielded 17.04 per cent.

NWC will start redeeming the bond in the fourth year of issue.

Falling in line

The yield on treasuries have been falling in line with a central bank push to lower interest rates, and is expected to maintain that trajectory under what is expected to be a sustained programme of reducing rates as a complement fiscal policy to lower the cost of servicing Jamaica's national debt.

"The NWC is gratified by the confidence and enthusiasm shown by the market and will continue to explore various ways of financing the necessary expansion and improvement of our operations to the benefit of customers and country," said NWC President E.G. Hunter in a prepared statement from Money Masters Limited.

The issue was structured by PricewaterhouseCoopers Jamaica, with Money Masters as financial advisor.

NWC is an independent state agency, whose operations are financed solely from its own revenue and other resources. The commission raises most of the capital it needs from the commercial markets, often successfully, because of Jamaica's backing through parliamentary-approved guarantees.

But this is the first time that NWC is known to have floated a bond in its home market, a position apparently forced on the state agency by the near-frozen international capital markets and worsened by the spectre raised by Standard and Poor's of a technical debt default by revenue-challenged Jamaica.

NWC's previous commercial forays were either foreign loans or local bank debt.

The bond was taken up by investors even though NWC is currently operating in the red.

The agency, in fiscal 2008-09 posted a $2.4 billion operating loss, but projects it can bring that down to $913 million this year.

Revenue was last reported at $13.5 billion.

Partial reason

Money Masters on Wednesday trumpeted the bond's backing by government as partial reason for the successful take-up.

Claudette Crooks, president of Money Masters said that buyers for the bond, for which subscriptions were closed on Thursday November 5, included local pension funds.

"It is a Government of Jamaica note, fully guaranteed," Crooks told the Financial Gleaner.

NWC will start redeeming the bond three years after issue, repaying $90 million semi-annually in 10 instalments, starting April 2012.

The final principal payment date is October 27, 2016.

JCSD Trustee Services Limited is the designated trustee, registrar and paying agent. The law firm Harrison and Harrison provided legal counsel.

Crooks said that the bond proceeds would be used by the NWC to minimise currency exposure on USD liabilities, as well as some Jamaican debt.

Buchanan suggested that the commission was forced into the market to borrow because the tariff or rate increases granted by the Office of Utilities Regulation were insufficient to cover the required investments in capital projects.

Government, several years ago weaned NWC from the public purse and no longer underwrites the bill for capital water works.

"The rates which we are given have never ever, in the history of the Water Commission, fully covered the cost of operation," said Buchanan.

"The Water Commission is expected to fully fund its operations from revenue in terms of capital expansion, new works as well as normal operations and maintenance. However, the economic regulator has not always given us the level of increase we need."

"A PricewaterhouseCoopers study done on our behalf has fully proven our case. It means that some of our undertakings are always going to need some kind of financing," he said.

avia.collinder@gleanerjm.com